Talking Tuesdays

AmeriVet Rates Commentary

December 18, 2024

Good morning, everyone. The last Fed day announcement of 2024 at 2pm today. This is going to move very quickly into 2025 where the focus will shift toward corporate issuance, Q1 inflation, and the changing of the guard in Washington on the 20th followed by the 1st Fed meeting on January 29th the week after. Good time for the Fed to take a break. 

And then they'll have almost 2 full months until the March meeting with a better view on the economic data and some of the initial moves from the President-elect. It's looking like taxes will be front toward mid-year 2025. There are surprises every year. And despite this being "late in the year" this world is very, very dynamic right now. The years have blended for quite some time and room for a little but not a lot of rest. 

The price action in the bond market is signaling concern over Fed policy amongst other things. But keeping inflation stable and contained in the underpinnings of fixed income. We had a brief post-election trade of "fiscal hawkishness". 

Please join us at 7am on Fox Business, tomorrow, as we recap today's Fed meeting a take a look at dynamics ahead into 2025. 

Let's Take a Look: 

We've shared our thoughts on this Fed meeting over the past few days. Simply put, there are a lot of moving parts right now. And when we see pockets like this it lends to thought of caution. Gradualism. Evaluation. And patience. 2024 was far from easy. But there were opportunities to make money, and we highlighted what we felt were mispriced levels along the way. In forward space markets look more appropriately priced but a terminal rate of 2.80% not too long ago was screaming as an opportunity. And now just under 4% could offer opportunity with the market consensus now for a more hawkish Fed outcome (less cuts). 

But navigating the pieces, 2025, will prove challenging on the monetary policy side. On one hand, there is already a fair deal in motion on the fiscal side which doesn't immediately go away. On the other hand, we know changes are coming. It's the last Fed meeting of 2024. Chair Powell knows there's a lot of activity to come beginning in January. No need to rock the boat entirely as we remain priced for a skip in January, perhaps resumption of cuts in March. We were vocal about the notion of calibration in 2024, 100-basis points. The Fed also had that notion in mind. Science. With that we also need to be open-minded to the notion that this phase of the easing cycle could be over for now.

Powell won't say that of course. And the Summary of Economic Projections won't show it. Unlike 2024 this is no longer about markets "guessing" the number of cuts it's more about the appropriate level of the policy rate and evolution of the balance sheet. The Fed seems intent on draining the rest of this RRP facility so continued balance sheet reduction will have a more direct impact on overall bank reserves which sit a bit over $3 trillion. And if we get sticky inflation readings to begin 2025 (plausible) which we have written of, whatever is left for rate cuts in 2025 could easily go away. Most market participants would agree that the last thing needed is for the Fed to find a need to reverse course. So, after today they need to be careful. 

We believe the broader committee gets it. There have been some good additions in the past year. It will be a lively discussion. And then layer on a messy world now. We like the notion of king US dollar but be careful how strong it gets. We have a lot of sensitivity to the US dollar around the globe. It's America first of course but not America only as we discussed in our Fed preview this week with our Co-CEO, Michael Naidrich. China (structural weakness, years and easing), Brazil (a mess), Canada (turmoil, change in the air), South Korea (populism), Europe (weak, fiscal, populism too), there's a lot of weakness out there. Structural stuff. Governmental change and drama. On top of the givens, we already know of the Middle East, Russia, Iran, Syria. The US has become a haven but there is a risk of spillover. 

Ultimately, the people on the ground have had it enduring the pandemic and the past four years. Populism is abounded. But we also live in very uncertain and dangerous times. In the United States some surveys are showing optimism. But narratives shift with politics in this environment, the onus changes, and a new story ensues. There is still very much a political undertone as to the state of economy and pathway forward. And a gap most certainly exists between existing conditions and likely changes to come. It takes time to completely eradicate inflation. And the Fed failed to deliver a knockout punch in 2022 although they certainly brought down the rate of change. Focusing on "2%" will ensure recession or perhaps deeper. 

With that, it's been an interesting couple of weeks in the bond market. Inflation looks sticky, term premium has spiked, and perhaps market participants are waking up to the realization that our fiscal picture is still ugly and doesn't change overnight. No surprise here we've been writing. And this notion that our incoming Treasury Secretary is a "fiscal hawk". This is Trump's economy plain and simple and we intimated that from the outset. He will call the shots. And as we wrote during the campaign there was very little on either side of the aisle to stem our fiscal trajectory. 

So, we'll need nominal growth which we've had. Higher inflation levels will be a part of the equation. The Fed has clearly been pushing that objective further out the curve without moving from the ridiculous 2% hardcore target (quasi higher inflation tolerance). More on that today, the landing year for "wink" 2%. The intention will be tax cuts paying for themselves. Tariffs will be a part of it although from a pure revenue perspective is small. Reciprocity is the term of the week. We will need "some form" of entitlement reform. The President-elect has appointed a savvy Social Security head. Gains from higher markets will help. Some wins from DOGE. Keen supply side focus and continued productivity gains. But supply side issues are far more complex than in 2016. 

Takes time. Feasible? It is. We have no choice. But there are unpopular choices to be made. Many of the President-elect's campaign promises were very popular. But how they translate to a better fiscal situation for the United States is not entirely clear. One switch doesn't turn off and another on. Some great ideas, concepts versus reality short-term will create more volatility in bond markets and rates. We would keep a very close eye on the US dollar. A strong dollar policy is good, but we don't want it excessively strong, and those dynamics are, and can further be, a product of issues abroad not here. The $ moves for many reasons. And the Fed will need to remain aware and vigilant. 

On the Ground

The skip is in for January. The initial work will be completed today (calibration). We have long written this cycle akin to 1994/1995. Over the past few years, we have also expressed the view that "higher for longer" doesn't necessarily mean 5.375% for longer. 

This Fed Chair has his work cut out. Likewise, the President-elect is not walking into the same economy or global landscape as 2016 (Inflation). The pressure between the two could build in a sticky inflation, higher rate scenario over time. 

It's an art not a science from here. The global landscape if fully noted above. It's every central bank for themselves. Currency is very much at hand. Haven and opportunistic flows into the United States will complicate monetary policy. The market's pricing of neutral just inside of 4% seems rational but we could easily trade 25-basis points either side of that quickly. 

The Fed's best course of action would be to sit on their hands after today. The Core PCE/CPI blend is running 2.5-3.5%. Of late some good signs on the housing front in CPI. The short-term dynamics out of Washington likely to keep some pressure on the inflationary dynamics.

Have a great day!